THE ECONOMIC WEEKLY September 15, 1962

Economies of Scale, Distribution of Industry

and Programming
A Rejoinder
Arthagnani

Jagdish Bhagwati ("Economies of Scale, Distribution of Industry and Programming The Economic
Weekly, September 1, 1962) poses certain problems relating to the technical and the political processes of
planning in India, which need deeper analysis than attempted by him.

Bhagwati's criticism is that licences for industries are given without taking note of various economies,
like those of scale or of spacing, and the solution he presents is to work out national industrial targets in-
to economic project reports according to which Industrial plants would be set up.

There is an implied assumption in Jagdish Bhagwatis argument — that there is a technically fixed
optimum Location and scale for each Industry (vide his examples of cars, refrigerators, paper and so on). In
fact, there are two fallacies here.

Firstly, the manufacture of none of these products can be said to constitute a separate "industry''.

Secondly, scale or location are not technically "fixed" — even over the myopic horizon over which
alone planners do, or can be expected to, plan.

MANY of the products cited by Need for Conceptual Clarity as also the lack of competition in
Jagdish Bhagwati are not To be able to do this, it w o u l d also the economy. In fact, the G o v e r n
" p r o d u c t s " , but composites of pro- be necessary f o r planners a n d some ment have in m a n y cases (for
ducts ( o r sub-products, i f B h a g w a t i economists to c l a r i f y notions on example, paper plants in the first
so l i k e s ) . Cars and refrigerators economies of scale, location, and so two P l a n s ) set down minimum
are assemblies of products from o n . T h e r e is not, in real life tech- sizes f o r plants allowed to be set
different i n d u s t r i a l groups (electrical nology, a single technically fixed up — a policy w h i c h , in the light of
and mechanical engineering and scale of production, but, given the w h a t is said earlier, is more ap-
o t h e r s ) ; paper is made out of pulp. technique, a range of levels of out- propriate than Jagdish Bhagwati's
The relevant v a r i a b l e t o " consider, put where average cost w o u l d be a suggestion of Government selling
m i n i m u m a n d about constant. it is pre-determined project reports to
therefore, is not the final product
o n l y w h e n a size change involves a prospective industrialists. In many
(in which alone consumers and
technical b r e a k - t h r o u g h or, parti- cases, it is the industrialist who
theoretical economists appear to be
c u l a r l y in chemical plants, oppor- does not w a n t a large licence be-
interested), but the economies of the
tunities f o r r e c o v e r i n g materials or cause he is new, or does not have
sub-products w h i c h , even when they
use of bye-products, that one enters large resources, or is not sure of
go into the same f i n a l product,
a horizon of a new cost level ( a g a i n , the m a r k e t . Unlike what Jagdish
w o u l d differ f o r each sub-product.
w i t h possibly constant costs over a B h a g w a t i states, instances of the
In the case of the car, the tyres,
r a n g e ) a n d there is no reason w h y Government imposing a smaller
the batteries and the electrical
such changes should a l w a y s involve capacity on an industrialist are
system a r e almost a l w a y s separately
an increase in scale. r a r e r than those of industrialists
organised as m a n u f a c t u r i n g orga-
a s k i n g f o r s m a l l e r capacity licences
nisms. In a r e f r i g e r a t o r , the cabi- T h i s is the o n l y reason w h y in
(and not because, as Jagdish
n e t - m a k i n g and compressor manu- the same i n d u s t r y or f o r the same
Bhagwati states, they fear the
facture are industrially distinct product, there exist, a n d survive in
Government w i l l not g r a n t them
activities. Pulp-manufacture need a competing w o r l d , plants of v a r y i n g
licences f o r a l a r g e r c a p a c i t y ) .
not a l w a y s be deemed an essential sizes. In the ease of cars, f o r ex-
constituent of a paper-maker's job. ample, the scales of operation on The logic of s m a l l plants lies not
There is, therefore, a l w a y s a case the European continent are m u c h in Government's desire to prevent
f o r vertical o r horizontal disinte- s m a l l e r t h a n in the U S A . So also monopoly as Jagdish Bhagwati
g r a t i o n of i n d u s t r y in I n d i a , as at in the case of r e f r i g e r a t o r s . And argues as in an attempt to decentra-
present constituted. If a r e t h i n k i n g in pulp m a n u f a c t u r e , it is not cer- lise the i n d u s t r i a l effort. This, of
of policy is to be done, the lines of t a i n that costs v a r y significantly as course, raises another dilemma :
between levels of production r a n g - should a g i v e n target be distributed
r e - t h i n k i n g w o u l d need to have a
tng f r o m 30.000 tons a year to among a small number of large
much wider horizon than those
100,000 tons. plants (as favoured by Jagdish
suggested by J a g d i s h Bhagwati —
covering each industrial produci Industrialists W a n t Small Plants B h a g w a t i ) or a m o n g a large n u m -
a n d its impact on the i n d u s t r i a l and J a g d i s h B a g w a t i is w o r r i e d about ber of s m a l l plants? T h i s is a pro
o r g a n i s a t i o n a l structure of i n d u s t r y the issue of i n d u s t r i a l licences in- blem of inter-temporal adjustment
in India. v o l v i n g s m a l l (uneconomic) plants of plant size : whether the process

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 THE ECONOMIC WEEKLY
September 15, 1962

of development should be economic Company Note

at every point of time or over a
period. The p r o b l e m i n I n d i a i s not
only to m a n u f a c t u r e a targetted Jay Engineering's Exports Fall
output but also to manufacture
entrepreneurs (to broaden the JAY Engineering Works has been W o r k s ' overall w o r k i n g results. T h e
industrial base); hence the small Company's a n n u a l report for the
one of the pioneer exporters of
licences. Economies Of scale are
durable consumer goods in this year ended M a r c h 3 1 , 1962 shows
obtained not in the immediate pre-
country. Within a relatively short an increase in net p r o f i t from Rs
sent but left to be obtained in the
period of time, it has built up a 26.14 lakhs in 1960-61 to Rs 3 0 7 9
succeeding periods w h e n total de-
considerable foreign market f o r its lakhs. Taken together with Rs
m a n d rises, ( I n c i d e n t a l l y , it is in
electric fans a n d sewing machines 7,173 b r o u g h t forward f r o m last
this context that the recent restric-
tions on maintenance imports and in A s i a , the M i d d l e East a n d even year, the total available f o r dis-
increases in excise levies are to be in E u r o p e , H o w e v e r , in 1961-62 the posal is Rs 3 0 , 8 6 lakhs.
regretted; they prevent m a n y i n d u - company's exports suffered a set-
stries f r o m reaching their optimum back. T h e value of e x p o r t s declined The Directors have proposed
capacity.) f r o m Rs 113 lakhs in 1960-61 to Rs that Rs 3 lakhs be allocated to the
91 lakhs. The Directors of the General Reserve. The dividend
I n this connection, J a g d i s h B h a g -
Company a t t r i b u t e this to import liability — at 10 per cent on p r e -
w a t i is obviously making a mis-
restrictions imposed in Ceylon, Bur- ference shares a n d 15 per cent on
take i n t h i n k i n g that licensing has
ma, Yugoslavia and E g y p t . Exports equity shares accounts f o r Rs
been restricted within the capacity
to these four countries had aggre- 27.77 lakhs, leaving Rs 9,036 to
targets (thus restricting competi-
gated to Rs 52 lakhs in 1960-61 be carried f o r w a r d to the next
tion). In fact, it has been pointed
against only Rs 19 lakhs this year. year. It will be noticed that in
out ("The Evolution of Industrial
Mow, foreign exchange difficulties spite of the higher p r o f i t the Direc-
Licensing Policy", the Economic
are not peculiar to I n d i a and it is tors have recommended a reduc-
T i m e s , J u l y 10, 1961), that i n d u s t r i a l
too much to expect that other Gov- tion in the dividend on equity
licensing has been more liberal.
ernments w i l l look k i n d l y upon the shares from 17.15 p e r cent in
T h i s has recently been c o n f i r m e d by
continued import of consumer 1960-61 to 15 per cent, both tax-
the G o v e r n m e n t in Ministers' re-
articles like fans and sewing ma- able. This year, however, the
plies to questions in the P a r l i a m e n t * ,
chines. At the same t i m e , however, d i s t r i b u t i o n is on a l a r g e r capital as
T h e point at issue here is not the company issued equity shares
these Governments would welcome
whether Industrial licensing should of the value of Rs 60,75 lakhs in
assistance in setting up indigenous
be more or less l i b e r a l , but whether 1960-61.
industries. Jay E n g i n e e r i n g Works
we should have planning or do
has risen to the occasion to meet
without it. Production of sewing machines
the challenge of restrictions imposed
T h i s is b a s i c a l l y a political pro- on irnpors of its products. Thus increased f r o m 2,56,000 i n I 9 6 0 - 6 1
blem. Jagdish Bhagwati would it secured permission from the to 2.73,000 but that of electric fans
l i k e planners to prepare project re- Government of Ceylon to set up a declined slightly f r o m 5,14,000 to
ports a n d sell them to prospective subsidiary company in Geylon, 5,13,000. Sales of both sewing
industrialists. T h i s is a technocrat's "Usha Industries L t d " , in which it machines a n d fans registered in-
concept of economic organisation. holds 51 per cent of the shares. creases. Sales of fans amounted
In fact, the v a r i a b l e s to be c o n s t Initially, the new company will to Rs 552.25 lakhs (Rs 501.71
dered in a r r i v i n g at such a solu- assemble fans a n d sewing machines lakhs) and of sewing machines to
tion, as s h o w n above, are more than from parts sent f r o m the parent Rs 386.38 lakhs (Rs 384.03 l a k h s ) .
those mentioned by Jagdish Bhag- company's f a c t o r y at Calcutta. In
wati. Some of these are a d m i r a b l y course of time, it is presumed, the T h e company's expansion pro-
stated by The Economic Weekly company would begin manufacture gramme in I n d i a is m a k i n g satis-
(September 1, 1962, p 1398) in the of fans and sewing machines in f a c t o r y progress. The construc-
note on automobile policy. P l a n n i n g Ceylon. It is not k n o w n whether tion of the new f a c t o r y at Hydera-
is b a s i c a l l y a political process, a n d Jay Engineering Works has ap- bad was started during the year
h o r s e - t r a d i n g is as prevalent in poli- proached other Governments, which and installation of machinery and
tics as in business. It w o u l d be have restricted import of the com- e q u i p m e n t is under w a y , Assembly
futile to seek h u m a n or social salva- pany's products, with similar pro- of Zig-Zag Machines has been
tion in a technocrat's paradise. positions f o r setting up local pro- started and is gradually expan-
duction w i t h the company's colla- ding. At present some parts
* Vide, Shri Nityanand Kanungo's boration, are supplied by the Calcutta fac-
reply to Shri A B Vajpayee in the tory but it is expected that pro-
Rajya Sabha on September 5, 1962 The decline in exports is not duction will gradually increase
(The Times of India, September 6,
1962). reflected in Jay Engineering during the current year.

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